nodes displayed on a city background representing and answering the question of what is DeFi?

What is DeFi (Decentralized Finance)?

· in Guides
Carlos is an international relations' analyst specializing in cryptocurrencies and blockchain technology. Since 2017, Carlos has written extensively for UseTheBitcoin and other leading cryptocurrency sites; with over 2,000 articles published.
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You might be wondering “What is DeFi?” and this is a fair question. The DeFi market has been expanding in recent years and it has been providing a wide range of opportunities to investors. Thus, the abovementioned question is definitely a very good one. 

The main goal of this post is to answer all the questions related to what is DeFi crypto. Furthermore, we will share with you the best DeFi solutions and how the decentralized finance market is changing the crypto industry. 

What is DeFi?

DeFi stands for Decentralized Finance. This is our core topic in our “What is DeFi?” guide. The decentralized finance market has been offering new and exclusive opportunities to investors. The main difference between DeFi and traditional finance is related to the decentralization nature of the decentralized finance market. 

By using blockchain technology, DeFi protocols are innovating the financial market. It has been possible for these protocols to make financial solutions accessible to everyone. Moreover, by using decentralization, innovative projects were able to add new functionalities to the crypto industry. 

Most of the DeFi solutions currently available in the market are based on the Ethereum (ETH) network. Thus, it is definitely important to understand that in our “What is DeFi?” guide. However, a larger number of DeFi apps has been growing in other blockchain networks such as Binance Smart Chain (BSC), Tron (TRX) and others. 

world from space

DeFi Decentralized Finance solutions use smart contracts to execute transactions. Moreover, with these smart contracts, DeFi solutions can work independently without the intervention of a centralized authority. Moreover, these smart contracts get executed once certain conditions are met.

One of the ways to measure the expansion of the DeFi market in recent years is by analysing the total value locked (TVL) in DeFi platforms. DeFi Pulse is currently providing very accurate data on that matter. 

According to DeFi Pulse, the total value locked in DeFi in U.S. dollars terms has almost reached $25 million. In Christmas, the TVL was just below $15 million. This shows how fast the industry continues growing. This is why it is very important to understand what is DeFi and how it works. 

DeFi Solutions, Services and Products

For you to have a clear idea of what is the DeFi market, we will share some of the examples of DeFi solutions currently available. 

If you want to trade cryptocurrencies, you need to go to a cryptocurrency exchange. At least, this was before the DeFi market existed. Nowadays, by using swap trading platforms, it is possible to do it in a decentralized manner. This is similar to traditional decentralized exchanges (DEX). 

Another solution provided by the DeFi market is related to borrowing and lending. Crypto traders and investors can easily borrow funds and lend their crypto savings. For example, you can borrow USDT and use your crypto assets as collateral and trade with these funds. 

If instead, you have digital assets because you are a long-term holder, then you can easily lend these assets. You can earn rewards on these funds just for lending them to other users. In general, DeFi platforms overcollateralize loans. Thus, if you don’t know what is DeFi, then you shouldn’t be worried about these loans. 

Furthermore, liquidity mining is also one of the most advanced DeFi solutions. Liquidity mining allows users to provide liquidity for trading pools and decentralized exchanges. This allows investors to earn rewards for the liquidity they share. 

Indeed, this is one of the DeFi solutions the market found in order to keep liquid trading pairs in a decentralized environment. By doing so, other traders will be able to enjoy the liquidity you are providing. In exchange, users and traders will pay a fee that could be as high as 0.3% of the trade. 

Investors can also stake their virtual currencies. For example, rather than using a traditional and centralized staking pool, it might be possible for them to use DeFi solutions. 

List of DeFi Solutions, Services and Products

This is a list of some of the DeFi solutions, currently available in the market that will help you understand what is DeFi. 

  • Token Swaps
  • Borrowing and Lending
  • Liquidity Mining
  • Crypto Staking
  • Decentralized Exchanges
  • Liquidity Provider

Although these are just some of the DeFi solutions available, there could be many others in the future. This is a fast-growing industry and projects are releasing new projects and products on a regular basis. Thus, the DeFi Decentralized Finance market is a very competitive and fast-growing industry. 

Top DeFi Protocols

There are dozens of DeFi protocols in the market right now. Some of them include Uniswap, Maker, Aave, Compound or Curve Finance, among others. 

Uniswap

Uniswap is perhaps the most popular DeFi protocol right now. This platform provides automated liquidity provision on Ethereum. Users can trade with Uniswap a wide range of tokens. Users can easily swap one token for another in just seconds. 

As we mentioned before, Uniswap works by using the reserves provided by users (liquidity providers). Liquidity providers earn rewards by sharing this liquidity with these protocols. Every single time a user performs a trade, a small part of the fees goes to the liquidity provider. 

Uniswap is a decentralized platform that could answer the question of what is DeFi. There are no centralized authorities, users can swap and exchange their coins, and liquidity providers earn rewards. This is one of the most efficient ways the market found to handle users’ needs. 

Uniswap official site background that allows us to better understand what is DeFi

Maker

Maker is another popular DeFi protocol. This was one of the first projects to be released to the DeFi market. This is a decentralized lending platform that runs on top of Ethereum and that created the DAI virtual currency. 

DAI was created to work as a stablecoin. Nowadays, DAI has a stable price which is close to $1 US dollar. Furthermore, Maker created one of the most innovative governance systems in the market. Everything was created using and leveraging Ethereum smart contracts. 

As Uniswap, Maker works in a totally decentralized way. 

maker logo

Aave

Let’s continue with our “What is DeFi?” guide with another decentralized finance protocol. Aave is also a DeFi solutions provider that wants to make finances available to everyone. Users can start borrowing and lending funds. 

This would allow them to get access to some of the most innovative solutions in the market. For example, users can deposit funds and earn rewards. Some of the funds that can be deposited include USDT, SUSD, BUSD, ETH and USDC, among others. The APY changes between 0% and 25%. In some cases, the interest rate for deposits can be higher. 

For users that want to borrow funds, the interest rates go from as low as 1% to as much as 65% during periods of high demand. 

aave official site

Compound

Compound Finance is another DeFi platform offering decentralized finance solutions. At the moment, Compound is allowing users to earn interest on assets they borrow. In order to borrow these funds, users should use collateral. 

As you can see most of these protocols are focused on offering borrowing and lending services. Nevertheless, the interest rates and conditions are slightly different on each of these platforms. The best thing is to always analyse which are the platforms that offer the best solutions. 

Furthermore, users can supply assets to liquidity pools and earn compounding interest. The platform was launched a few years ago but it attracted a larger number of users in the second half of 2020. 

Compound Finance protocol official website

Yearn Finance

Finally, another DeFi protocol includes Yearn.Finance. It becomes sometimes difficult for users to understand which are the different solutions present in the market. This is why Yearn.Finance was created. 

Yearn.Finance converts the tokens you deposit in yTokens. These are rebalanced among the most profitable lending platforms in the DeFi market. This would reduce your work searching for the highest yield among the platforms available in the DeFi space. 

Furthermore, to fully understand what is DeFi, we also need to understand that Yearn.Finance has a governance token. This token is distributed to users that provide liquidity with yTokens. Nowadays, the YFI token is among the largest in the world. 

Yearn Finance official website with new background

Other DeFi Platfoms

The market has seen the creation of many other DeFi platforms. To better know what is DeFi, users should analyse the different protocols out there. Some of these protocols include Curve Finance, SushiSwap, Synthetic or Balancer. But there are many others. 

The safest thing is to always follow those protocols that have the largest assets locked. DeFi Pulse provides very valuable information on that matter. 

Decentralized Finance vs Decentralized Applications

The cryptocurrency market has seen the expansion of decentralized applications (dApps). These dApps were the beginning of the DeFi market. Indeed, projects in the crypto and blockchain markets were investing in different initiatives to offer blockchain-based solutions to individuals all over the world. 

Nevertheless, these initiatives were focusing usually on Online Casinos, and projects that could grow. Many of these projects couldn’t survive. Despite that, there are some dApps that are still running and working with thousands of daily users. 

DeFi could be considered the evolution of the dApp market. While the dApp market searched for users, investors found the DeFi market. The demand for decentralized finance services allowed the DeFi market to grow and reach the value it has nowadays. 

Positive and Negative Aspects of Decentralized Finance

There are some positive and negative aspects of the Decentralized Finance market. Of course, this will also highly depend on the services you use. Moreover, some positive or negative things might not apply to you, thus, you should use this as a guide to better understand what is DeFi. 

DeFi Positive Aspects

DeFi works in a totally decentralized manner. Thanks to this, individuals from all over the world are getting access to permissionless solutions to handle their financial needs. 

Furthermore, DeFi has been gaining traction in the crypto market. Due to this reason, a large number of early investors was able to profit with this growth. 

In addition to it, DeFi can handle services centralized companies cannot offer in an efficient way. For example, the borrowing and lending market allowed users to meet many of their financial needs. 

The number of solutions provided by DeFi projects is growing. This is something we need to take into consideration. The larger the options available, the better for the crypto and DeFi markets to expand. 

DeFi Negative Aspects

As we also know, there are some negative aspects of this market. This would help us to fully understand what is DeFi. 

One of the negative things includes the fact that the market is still in its early stages. The number of platforms is still reduced. This could provide large opportunities to investors that like to take risks, however, it could also be harmful if the project ends up being a scam. 

Some of the projects could certainly be scams that want to profit from investors that do not know about DeFi. By promising to become the next DeFi platform, users could easily fall victim to these protocols. 

Furthermore, in terms of regulations, there are no countries properly regulating the market. Of course, this could be a positive thing for many. Nevertheless, this would not allow larger investors to become part of this exciting and fast-growing industry. 

Final Words on Decentralized Finance

The DeFi market is continuously moving and growing. The different protocols currently available are changing the notions we had about the traditional financial market. Now that we know what is DeFi, we can properly understand the impact this sector is having in the crypto market. 

In the coming years, the DeFi market could gain a larger number of users. This would help protocols expand and offer better solutions. Additionally, it might be possible for the entire market to reach a larger number of users from traditional finance. 

In order for this to happen, better and clearer regulations would have to be in place. Nevertheless, there is no clear idea as of today of what governments are planning to do with this exciting DeFi market.